Basic Terminology of Stock Market and Mutual Funds

Here, we have a list of most common terms used in stock market and daily used to analyze the stocks and market trends.

Agent: A brokerage firm is said to be an agent when it acts on behalf of the client in buying or purchasing of shares. At no point of time in the entire transaction the agent will own the shares. 

Ask/Offer: The lowest price an owner is willing to sell the stocks or we can say at which price seller is offering the stock. 

Assets: Everything the company owns on its name, including the cash, equipment’s, land, technology etc. that shows the total wealth of the company. It include all tangible and intangible items own by the company. 

At the money: A situation at which an options strike price is identical to the price of the underlying securities. Options trading activity tends to be high when options are at the money. 

Bear Market: A market in which stock prices are falling consistently.

Beta: It is a measurement of relationship between stock price of any particular stock and the movement of whole market. 

Bid: It is the highest price a buyer is willing to pay for a stock. It is opposite of ask/offer.

Blue Chip Stock: Stocks of large, well-established and financially-sound companies which hold a record of consistently increasing rate of paying the dividends over decades to its stock holders. Blue chip stocks typically have a market capitalization in thousands of crores.

Board Lot: A standard trading unit as defined by the particular exchange board. Board lot size usually depends on the per share price. Common board lot size are 50, 100, 500, 1000 units. 

Bonds: It is promissory note issued by companies or government to its buyers. It speaks about the specified amount held for a specified time period by the buyer. 

Book: An electronic record of managing all the pending buy and sell orders of particular stocks.

Broker/Brokerage Firm: A registered securities firm are called broker/brokerage firm. Broker’s acts as an adviser for purchase and sell of listed stocks, they do not own the securities at any point of the time. But they charge a commission for their service. 

Bull Market: A market in which the stock price are increasing consistently. 

Business Day: Monday to Friday, excluding public holidays. 

Call Option: An option that is given to investor the right but not obligation to buy a particular stock at a specified price within a specified time period. 

Close Price: The final price at which the stock is traded on a given particular trading day or last traded price of the stock on a trading day.

Commodities: Product used for commerce that are traded on a separate, authorized commodities platform. Commodities include agricultural products and natural resources. 

Convertible Securities: A security (bonds, debentures, preferred stocks) by an issuer that can be converted into other securities of that issuer are known as convertible securities. The conversion usually occurs at the option of the holder, but it may occur at the option of the issuer. Like a convertible bond or convertible note or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in the issuing company or cash of equal value.

Debentures: A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. A debenture is an unsecured form of investment. 

Defensive Stock: A stock that provides a constant dividends and stable earnings even in the periods of economic downturn i.e. even in the extreme critical situations of the stock market these companies continue to pay the dividends at a constant rate. 

Delta: The ratio that compares the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the hedge ratio. It has a range from 0 to 1. 

Derivatives: A security whose price is derived from one or more underlying assets. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. 

Diversification: Reducing the investment risk by purchasing shares of different companies operating in different sectors.

Dividend: A portion of the company’s earnings decided to pay to its shareholders in return to their investments. It is usually declared as a percentage of current share price (Face value of the Stock) or some specified INR value, usually decided by the board of directors of the company. 

Entry Load: Commission charged by the fund manager while purchasing mutual funds.

Equity: Common and preferred stocks, which represents shares in the ownership of a company. If a person holds 10% stocks of company then that person have 10% ownership of the company.

Exit Load:  Commission charged by the fund manager while selling mutual funds units before a lock in period set by the fund manager..

Face value: It is the cash denomination or the amount of money the holder of the individual security going to earn from the issuer of the security at the time of maturity. It is also known as par value. It is fixed and not related to trading of the stocks. Face value may change in case of stock splits. 

Hedge: A strategy or an attempt in reducing the risk of adverse price movements of assets. 

Income Stock: A security which has a solid record of dividend payments and offers the dividend higher than the common stocks. 

Index: A statistical measurement of change in the economy or security market. Indices have their own calculation methodology and are usually measured as a percentage change in the base value over the time, In India, we have Sensex, NIFTY, NIFTY50, NIFTY AUTO, NIFTY Energy, NIFTY Banking and Finance etc etc.

Initial Public Offering (IPO): A company’s first issue of shares to general public. IPOs are issued by smaller, younger companies seeking funds for expansion and growth, but large companies also practice this to become publicly traded companies. IPO is completely under scanner of SEBI. 

Internet Trading: Internet Trading is a platform with Internet as a medium. Internet trading execution takes place through order routing system, which will rout traders order to exchange trading system. Thus traders sitting in any part of the world can be able to trade using their brokers Internet Trading System. The Securities and Exchange Board of India (SEBI) approved Internet Trading in January 2000. 

Limit Order: An order to buy or sell a share at a specified price. The order will be executed only at the specified limit price or even better. A limit order sets a minimum price the seller is willing to accept and maximum price the buyer is willing to pay for it. 

Listed Stocks: The shares of an issuer that are traded on the stock exchange. The issuer has to pay fees to be listed in the stock exchange and abide by the regulations of the stock exchange to maintain listing privilege. 

Market Capitalization: The total value in INR of all of a company’s outstanding shares. It is calculated by multiplying all the outstanding shares with the current market price of one share. It determines the company’s size in terms of its wealth. 

Market Cap = No of Total Shares * Current Market Price of Each Share

Mutual Fund: A pool of money managed by experts by investing in stocks, bonds and other securities with the objective of improving their savings. These experts will create a diversified portfolio from these funds. 

NAV: Net Asset Value is a current value of a unit of a particular Mutual Fund at which you can will buy the units.

Odd Lot: A number of shares which are less than or greater than but not equal to the board lot size. For example, if the board lot size is 100 shares, an odd lot would be 98 or 105 shares. Usually odd lots are difficult for trading and it is not accepted easily in the market. 

One-sided Market: A market that has only potential sellers or only potential buyers but not both. 

Out-of-The-Money (OTM): For call options, this means the stock price is below the strike price. For put options, this means the stock price is above the strike price. The price of out-of-the-money options consists entirely of “time value.” 

Portfolio: Holding of any individual or institution. A portfolio may include various type of securities of different companies operating in different sectors. 

Positions Limit: Maximum number of futures and options contract that any individual investor can hold at any given point of time. 

Pre-opening Session: The pre-open session is for duration of 15 minutes i.e. from 9:00 AM to 9:15 AM. In pre-open session order entry, modification and cancellation takes place. 

Price Earnings (P/E) Ratio: A valuation of companies last traded share price to its latest reported 12 months earnings per share. For example, if the last traded share price of any A company is INR 50 and earnings over a last 12 months per share is INR 10, then the P/E ratio of that A company is INR 5 (50/10) 

Put Option: An option that is given to investor the right to sell a particular stock at a stated price within a specified time period. Put option is purchased by those who believe that particular stock price is going to fall down than the stated price. 

Risk: A probable chances of investments actual returns will be reduced then as calculated. Risk is usually measured by calculating the standard deviation of the historical price returns. Standard deviation is directly proportional to the degree of risk associated. 

Securities: A transferable certificate of ownership of investment in products such as stocks, bonds, future contracts and options which an individual holds. 

Strike Price: The price at which the holder of an option can buy (in case of call option) or sell (in case of put option) the securities they hold when the option is executed. 

Stock Split: An attempt to increase the number of outstanding shares of a company by splitting the existing shares. It is usually done to increase the availability of shares in the market. The usual split ratio is 2:1 or 3:1, i.e. one share is split into two or three. 

Thin Market: A market in which there are comparatively low number of bids to buy and offers to sell. Since the number of transactions is low the prices are very volatile. 

Trading session: The period from 9:15 AM to 3:30 PM is open for trading for both sellers and buyers, within this time frame all the orders of the day must be placed. Here all the orders placed in pre-opening sessions are matched and executed. 

Yield: It is the measure of return on investments in terms of percentage. Stock yield is calculated by dividing the current price of the share by the annual dividend paid by the company for that share. For example, if the current price of the share is INR 100 and the dividend paid is INR 5 per share annually, then the stock yield is 5%.